Legislation introduced in the House of Reps on 25 May 2017 has proposed a range of technical amendments to ensure that the $1.6m super pension cap operates as intended, including an integrity measure for limited recourse borrowing arrangements (LRBAs) used by SMSFs.
Importantly, the Bill has been revised from the draft legislation previously released on 27 April. Most notably, the Bill has not carried over the draft proposal that would have seen an individual’s share of the outstanding balance on a LRBA included in their “total superannuation balance”. Presumably, this aspect of the draft legislation will now not proceed. This is welcome news as it would have heavily restricted the future use of LRBAs.
Instead, the Bill only includes the LRBA integrity measure that will generate a credit in a member’s pension transfer balance account for repayments of principal and interest on a LRBA, where it is paid from a member’s accumulation account. The measure is aimed at concerns about the ability of SMSF members to potentially use LRBAs to effectively transfer the growth in fund assets to the retirement phase, which would not currently be captured by the $1.6m pension cap regime. However, if the LRBA repayment by the fund is sourced from assets supporting the same retirement phase interest, it will not result in a transfer balance credit, as the LRBA reduction is naturally offset by a corresponding reduction in cash.
The measure will only apply prospectively in relation to borrowings entered into on or after 1 July 2017. Importantly, the Bill includes a transitional provision so that it will not apply to the re-financing of an existing pre-July 2017 borrowing.
Full details on the Bill will be reported in Thomson Reuters Weekly Tax Bulletin (Issue 22, 26 May 2017). Find out more about subscribing to Weekly Tax Bulletin to receive all the latest ongoing tax, GST and superannuation developments.